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Huge Tax Increases in Store for 2013

This article highlights the potential tax increases that Americans may face in 2013 if Congress fails to act on expiring tax cuts. It also discusses the impact on households, businesses, and the overall economy. The article explores candidate and legislative proposals regarding tax rates, deductions, and credits.

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Huge Tax Increases in Store for 2013

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  1. SMALL BUSINESS BEWARE HUGE TAX INCREASES IN STORE FOR 2013 October 17, 2012 Joseph P. Nicola, Jr. Sisterson & Co., LLP Pittsburgh, PA 412-594-7006 jpnicola @ sisterson.com

  2. FISCAL CLIFF The most compelling issue facing Congress is the so-called “fiscal cliff.” According to the Tax Policy Institute (TPI), if Congress fails to act on expiring tax cuts by the end of 2012, nine out of 10 Americans will see their taxes go up, as average households would see a $3,500 increase.

  3. Without legislative action, most tax cuts enacted since 2001 will expire on January 1, 2013, raising tax rates, reducing deductions and credits, and exposing millions of taxpayers under the alternative minimum tax (AMT), according to a TPI report. The estate tax would hit more than 10 times as many estates as in 2012.

  4. The two-percentage point cut in the payroll tax rate would lapse, raising taxes on more than 120-million households with workers. Short-term tax breaks that Congress regularly renews, some of which have already lapsed, would disappear, boosting taxes for both individuals and businesses. In addition, the 2010 healthcare legislation would impose new taxes on high-income taxpayers.

  5. For most households, the two biggest increases would be the expiration of the temporary cut in Social Security taxes and the expiration of the 2001/2003 tax cuts. The wealthy would be hit hard by the expiration of the 2001/2003 tax cuts that apply at upper income levels and the start of the new health care reform taxes.

  6. However, the resulting macroeconomic tightening could well push the country back into recession in 2013, according to a report by the Congressional Budget Office.

  7. Candidate and Legislative Proposals Both candidates favor a reduction in tax rates in the mid-term, to be followed by more comprehensive tax reform in the long-term. During their debates, President Obama affirmed that he favors tax cuts for all but the wealthiest taxpayers, while Mitt Romney affirmed that he would maintain the Bush tax cuts for all taxpayers, while reducing or eliminating certain deductions.

  8. Individual Tax Rates, Deductions and Credits Under current law, the reduced individual income tax rates are scheduled to sunset after 2012. Unless extended, the individual marginal tax rates, currently at 10, 15, 25, 28, 33, and 35 percent, are scheduled to revert to 15, 28, 31, 36, and 39.6 percent, effective for tax years beginning after December 31, 2012.

  9. President Obama, in his Blueprint for America and other proposals, has called for making permanent the 10, 15, 25, and 28 percent rates for tax years beginning after December 31, 2012 for all but the wealthiest taxpayers ($200K/$250K thresholds).

  10. Similar to the favorable graduated rate schedule, under current law, there is no marriage penalty or Pease limitation through 2012. Numerous proposals favor an extension of the penalty relief for all but the wealthiest taxpayers, though Republicans (in decreasing numbers) would retain this benefit for all taxpayers. The Pease limitation appears to be on its way back.

  11. Under current law, the Earned Income Credit and the Child Tax Credit are enhanced through 2012. Both candidates for President have advocated an extension of both enhancements.

  12. 15% Rate Bracket for Married Filers Current Law: No marriage penalty January 1, 2013: Marriage penalty

  13. Capital Gains Rates For Individuals Current Law: Generally 15% (or 0%) January 1, 2013: Generally 20%

  14. Dividends Current Law: Generally 15% (or 0%) January 1, 2013: Ordinary income

  15. Dependent Care Credit Current Law: Dollar Limit $3K/$6K 35% credit Phase out at $15,000 January 1, 2013: Limit $2,400/$4,800 30% credit Phase out at $10,000

  16. Child Tax Credit Current Law: $1,000 per child Offset AMT January 1, 2013: $500 per child No offset AMT

  17. American Opportunity Tax Credit Current Law: Max is $2,500 Partially refundable Available first 4 years January 1, 2013: Hope credit Max TBA No refund Available 2 years

  18. Energy Credit Home Construction Current Law: No credit (expired for homes acquired after 12/31/11) January 1, 2013: No credit

  19. Credit for Energy Efficient Appliances Current Law: No credit (expired after 2011 January 1, 2013: No credit

  20. Work Opportunity Tax Credit Current Law: 40% through end of 2011 (2012 for veterans) January 1, 2013: Credit for certain veterans hired through 2012

  21. Refundable Minimum Tax Credit For Individuals Current Law: Long-term credit unused credit through 2012 January 1, 2013: No credit

  22. AMT Exemption Amount Through 2011 : Generally indexed with one-year patches. January 1, 2013: $45,000 joint filers; $33,750 single filers

  23. For 2011, the exemption amounts were $48,450 for unmarried individuals filing a single return, and $74,450 for married couples filing a joint return and surviving spouses.

  24. School Teacher Deduction Current Law: Deduction through 2011 January 1, 2013: No deduction

  25. Overall Limit on Itemized Deductions Current Law: No limit January 1, 2013: 3% rule applies

  26. Discharge of Principal Residence Debt Current Law: Not income for pre- 2013 discharges January 1, 2013: Discharge is taxable

  27. Flexible Spending Accounts Current Law: Generally no limit on contributions January 1, 2013: $2,500 annual limit

  28. Employer Education Assistance Current Law: $5,250 exclusion through 2012 January 1, 2013: No exclusion

  29. Phase-Out Personal Exemptions Current Law: No phase out January 1, 2013: Phase-out at higher income levels

  30. State and Local Sales Tax Deduction Current Law: Expired in 2011 January 1, 2013: None

  31. 15-Year Depreciation of Qualified Leaseholds and Certain Retail Realty Current Law: Expired in 2011 January 1, 2013: 39 years

  32. Bonus Depreciation Current Law: 100% in 2011; 50% in 2012 January 1, 2013: No bonus (except certain long-lived property)

  33. Section 179 Current Law: 2011 was $500,000 ($2 million investment limit); 2012 is $139,000 ($560,000 investment limit) January 1, 2013: $25,000 maximum ($200,000 investment limit)

  34. Medical Expense Deduction Current Law: Deduct excess over 7.5% AGI January 1, 2013: Deduct excess over 10% AGI

  35. Student Loan Interest Current Law: Phase-Out at $60K AGI January 1, 2013: Phase-Out at $40K AGI

  36. Deduction for Tuition and Expenses Current Law: Expired in 2011 January 1, 2013: None

  37. Tax-Free Transfer from IRA to Charity Current Law: Expired in 2011 January 1, 2013: None

  38. Section 1202 Stock Current Law: 100% exclusion of gain on stock bought 9/27/2010 – 12/31/2011; 50% thereafter January 1, 2013: 50% exclusion

  39. Payroll Tax Cut Current Law: SS rate 4.2% January 1, 2013: SS rate 6.2%

  40. Estate Tax Rate Current Law: Max rate 35% January 1, 2013: Max rate 55%

  41. Estate and Gift Tax Exemption Current Law: $5,120,000 exemption January 1, 2013: $1 million exemption

  42. Portability Current Law: Surviving spouse can use decedent spouse’s unused exclusion amount January 1, 2013: No such provision

  43. Legislation of Top Priority: Extenders Congress will act to jealously guard certain expiring benefits. President Obama has advocated an extension of most of the following: • 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. • Work opportunity tax credit. • Treatment of certain dividends of a regulated investment company (RIC). • Refined coal credit.

  44. Alternative fuel and alternative fuel mixtures credit. • Suspension of limitation on percentage depletion for oil and gas from marginal wells. • Energy and ethanol credits. • Bonus depreciation. • R&D credit.

  45. 2012 2013 Top individual tax rate 35% 39.6% Capital Gains 15%20% Dividends 15% Ord Income Top estate tax rate 35% 55% Child tax credit $1,000 $500 AOTC Up to $2,500 Unavailable Section 179 dollar limit $139,000 $25,000 Bonus depreciation 50% Unavailable Research tax credit Unavailable Unavailable

  46. On June 28, 2012, the U. S. Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act (PPACA).

  47. Additional Medicare Tax Starting in 2013, an additional 0.9 percent Medicare tax is imposed on wages and self-employment income of higher-income individuals (single $200,000; married $250,000).

  48. Employers must withhold on the higher rate if the employee receives wages in excess of $200,000. The employer may disregard the amount of wages received by the employee's spouse. If the Medicare tax is not withheld by the employer, the employee is required to pay the tax.

  49. Medicare Tax On Investment Income Starting in 2013, 3.8 percent Medicare tax applies to unearned income. The tax is imposed on the lesser of an individual's net investment income or modified adjusted gross income in excess of $200,000 ($250,000 for married couples).

  50. Net investment income is the excess of the sum of the following items less related deductions: • Interest • Dividends • Annuities • Rents and royalties • Nonbusiness gains • Home sale in excess of exclusion

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